Lesson 1 & 2 - Investment & Income PDF

LIFE PERFORMANCE OUTCOME LPO1: MINDFUL, SELF-DIRECTED LEARNERS AND ROLE MODEL I AM A MINDFUL, SELF-DIRECTED LEARNER AND ROLE MODEL, CONSCIOUSLY EXPRESSING MY FAITH. WHY SHOULD ENTREPRENEURS CONDUCT A FINANCIAL FORECASTING BEFORE LAUNCHING A BUSINESS?...

LIFE PERFORMANCE OUTCOME LPO1: MINDFUL, SELF-DIRECTED LEARNERS AND ROLE MODEL I AM A MINDFUL, SELF-DIRECTED LEARNER AND ROLE MODEL, CONSCIOUSLY EXPRESSING MY FAITH. WHY SHOULD ENTREPRENEURS CONDUCT A FINANCIAL FORECASTING BEFORE LAUNCHING A BUSINESS? 2 LESSON 1 INVESTMENT PREREQUISITES Learning Understand the meaning of Objectives financial forecasting. Identify the different investment At the end of the lesson, you should prerequisites in be able to do the entrepreneurship. following: EVALUAT ENGAGE EXPLORE EXPLAIN EXTEND 44 1. What comes to your mind when you hear the word “investment”? 2. How much are you willing to shell out to start your proposed business? 3. What do you think should an entrepreneur do to avoid incurring losses during the start of his or her business? EVALUAT ENGAGE EXPLORE EXPLAIN EXTEND 5  FINANCIAL FORECASTING Financial forecasting is the act of estimating the future financial outcomes of a business, such as its income and expenses, over a period of time. 6  FINANCIAL FORECASTING Generally, financial forecasting can be performed through the use of accounting and sales data and other economic indicators. 7  INVESTMENT PREREQUISITES 1. Organizational and Pre-operating Costs The organizational and pre-operating costs pertain to those expenses in preparation for the official launch or start of the business. These expenses comprise those that are incurred during the start of a business. 8 EXAMPLE: PRE-OPERATING COSTS OF BUSINESS Business plan Every startup business would require a detailed business plan that might also consist of both pre-feasibility and feasibility study. 9 EXAMPLE: PRE-OPERATING COSTS OF BUSINESS Research expenses Before starting with the business operations, it is a golden rule to conduct careful and thorough research of the industry and the target market. 10 EXAMPLE: PRE-OPERATING COSTS OF BUSINESS Product development costs A successful product launch would always start with a realistic budget. Being able to identify the whole product development costs will help the entrepreneur in calculating the return on investment (ROI). 11 EXAMPLE: PRE-OPERATING COSTS OF BUSINESS Initial promotional costs Every startup business is unlikely to succeed without taking into consideration its promotional strategy. 12 What other examples of pre- operating expenses can you give? 13  INVESTMENT PREREQUISITES 2. Production or Service Facilities Costs These costs pertain to long-term investments that are needed for actual business operations. They include all facilities, equipment, and tools needed to run the day-to-day operations of a business. 14 THREE BASIC CATEGORIES OF PRODUCTION COSTS A. Direct material The cost of direct materials refers to the purchasing of raw materials that goes with production. 15 THREE BASIC CATEGORIES OF PRODUCTION COSTS B. Direct labor This refers to the benefits, fees, salaries, and other forms of payment given to employees and staff who are directly involved in manufacturing the products. 16 THREE BASIC CATEGORIES OF PRODUCTION COSTS C. Factory overhead The costs required in maintaining the overall production are categorized under factory overhead costs. 17 Tip Expenses that fall under production or service facilities costs are all capital expenditures (except land), and they are usually depreciated over a longer period of time. 18  INVESTMENT PREREQUISITES 3. Working Capital Investments Working capital refers to the liquid assets that a business has on hand. This investment is important in entrepreneurship, for it is the source of payment for all unforeseen and planned expenses of the business as well as its short-term monetary obligations. 19  INVESTMENT PREREQUISITES Working capital investment consists of the investment needed to be able to operationalize the business. 20  ACTIVITY Briefly explain the three different investment prerequisites. 1. Organizational and pre-operating costs 2. Production or service facilities costs 3. Working capital investments 21 LESSON 2 INCOME STATEMENT PREPARATION 23 24  QUESTION 1. What do you think is the main objective of establishing a business? 2. What is the reason why most startup businesses incur losses in the beginning? 3. How much is your preferred monthly income if you will start your own business? 25  INCOME STATEMENT a detailed report that shows all the income or earnings, expenses, and the resulting profits or losses of a business for a given accounting period 26  INCOME STATEMENT This is the primary financial statement that must be prepared because the resulting net income or loss incurred by the business must be calculated before preparing other financial statements. 27  PURPOSE OF INCOME STATEMENT Internal users are composed of people who are in charge of the business as well as the board of directors in big corporations. These people use the income statement to analyze the performance of the business and to be able to make effective decisions. 28  PURPOSE OF INCOME STATEMENT External users are composed of the investors and creditors of the business. These people are the outside forces in the business who are indirectly related to its operations. 29 INCOME STATEMENT FORMULA AND PREPARATION Since the income statement is meant to measure the performance of a business with respect to its revenues and expenses, the formula is: Revenues - Expenses = Income or Profit (Loss) 30  PARTS OF INCOME STATEMENT Gross Sales or Sales Revenue Every income statement would always start with the business’s gross sales or revenues. The approach to be taken in calculating this figure will depend on the accounting method adopted by the business and how it assesses its overall revenues. 31  PARTS OF INCOME STATEMENT Cost of Goods Sold (COGS) The cost of goods sold refers to the direct costs associated with producing all of the products and/or services sold by the business. 32  PARTS OF INCOME STATEMENT Gross Profit/Margin Gross profit/margin is derived from subtracting the total cost of goods sold from the sales revenue. This variable of the income statement manifests the profitability of the business after taking into account the direct costs incurred. 33  PARTS OF INCOME STATEMENT Operating Expenses Also referred to as general expenses, operating expenses mainly include rent or lease, bank fees, equipment or machinery expenses, marketing and advertising expenses, and all other expenditures to keep the business going. 34  PARTS OF INCOME STATEMENT 5. Operating Profit/Margin The operating profit in an income statement reflects the residual income after deducting all expenses or costs of doing business, excluding deductions of interests and taxes. 35  PARTS OF INCOME STATEMENT 7. Net Profit after Taxes Net profit after taxes is the variable that always marks the end of an income statement. It is a financial term that reflects the profit of a business after all taxes have already been paid. 36  PARTS OF INCOME STATEMENT 7. Net Profit after Taxes Net profit after taxes is the variable that always marks the end of an income statement. It is a financial term that reflects the profit of a business after all taxes have already been paid. 37 38 38 Financial forecasting is the act of estimating the future financial outcomes of a business, such as its income and expenses, over a period of time. 39 The following are the three different investment prerequisites: organizational and pre-operating costs, production or service facilities costs, and working capital investments. 40 The following are the categories of production/service facilities costs: direct material, direct labor, and factory overhead. 41 42 Burns, Paul. Entrepreneurship and Small Business: Start-up, Growth, and Maturity. Basingstoke: Palgrave Macmillan, 2011. Keister, Lisa A. Entrepreneurship. Boston: Elsevier JAI, 2005. Price, Robert W. Entrepreneurship. Dubuque, Iowa: McGraw-Hill/Dushkin, 2006. Shintani, Mototsugu. “Financial Forecasting, Sensitive Dependence.” Encyclopedia of Complexity and Systems Science (2009). Zhu, Anmin, and Xin Yi. “The Comparisons of Four Methods for Financial Forecast.” 2012 IEEE International Conference on Automation and Logistics (2012): 45-50. 43